At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Sharpen your wits
You wouldn't know it from how the stock price reacted, but Motley Fool Rule Breakers recommendation Intuitive Surgical (Nasdaq: ISRG) picked up another "buy" rating last week. Praising the company as "highly profitable" and "growing at rates above most other large cap medical device companies," securities firm Collins Stewart advised investors Thursday to buy Intuitive.

Granted, the stock looks a little pricey for such an endorsement. At 34 times trailing earnings, Intuitive shares carry a valuation roughly twice what you'll find at other companies hawking big-ticket medical equipment to hospitals. A share of Siemens (NYSE: SI) or General Electric (NYSE: GE), for example, sells at 19 times and 17 times earnings, respectively, while Philips (NYSE: PHG) fetches a mere 15 P/E. Why, an investor might ask, should we pay twice the price for Intuitive than its more diversified peers cost?

Let's go to the tape
Why indeed? One answer might begin with the record of the analyst recommending Intuitive today (but doesn't end there). Ranked in 78th percentile of investors we track on CAPS, wealth manager Collins Stewart isn't exactly the best analyst on the planet -- but when it comes to picking medical equipment stocks, it is a pretty sharp stock picker, having correctly chosen stocks such as ...


CS Rating

CAPS Rating
(out of 5)

CS's Picks Beating
S&P by

St Jude Medical (NYSE: STJ) Outperform **** 19 points
Kinetic Concepts (NYSE: KCI) Outperform ***** 18 points
Boston Scientific (NYSE: BSX) Outperform *** 6 points

... to outperform the market. Overall, Collins Stewart sports a record of 56% accuracy in this industry for recommendations made over the past five years. All of which argues in favor of it also being right on this week's Intuitive guess.

Price matters -- but so does growth
So that's the first reason to like Intuitive today: the reputation of the analyst recommending it. But what about the stock itself? After all, even Collins Stewart admits Intuitive Surgical costs more than "its peers."

Still, the banker argues that this premium valuation is "well-deserved." Intuitive's "end markets still remain underpenetrated." As a result, even today, at a market cap of X and annual sales of Y, there remain "robust market opportunities with limited (if any) near-term competition" for Intuitive.

Nor is Collins Stewart the only firm that thinks so. Sure, Intuitive costs more than GE, Siemens, and Philips -- valued on its GAAP earnings, it costs more than St. Jude or Kinetic Concepts as well (but not Boston-Sci, which is currently going through an earnings slump that's left it P/E-less). But consider: Up on Wall Street, the consensus of analysts polled is that even if much of Intuitive's growth is behind it, the company still has the ability to expand its profits at about 23% per year over the next five years. That's nearly twice as fast as the growth estimate for St. Jude, for example, and close to three times as fast as either Kinetic Concepts or Boston Scientific are expected to grow. So if Intuitive costs more than the competition ... well, maybe it's worth the price.

... and maybe it isn't
As for me, while I certainly understand the stock's attraction, I just cannot get on board with Intuitive at today's prices. Sure, you have to look long and hard to find a company in the med-equip industry growing at anything approaching Intuitive's pace, and I commend it for that.

Personally, though, I've never been a big fan of "growth at any price." When I look at Intuitive Surgical's valuation today -- yes, even with this growth rate -- I find it hard to justify the valuation; 34 times earnings is a pretty penny, and even if you value the stock on its more robust "free cash flow," the valuation here looks stretched.

Twenty-nine times FCF on a 23% grower? Thanks, but I'll pass.

Intuitive Surgical is a Motley Fool Rule Breakers pick, and The Fool owns shares of Kinetic Concepts, but Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 465 out of more than 170,000 members. The Motley Fool has a disclosure policy.

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